Portuguese Court of Auditors uncovers profiteering in the water sector

An investigation by the Court of Auditors has uncovered the true consequences of private management of the water sector: private companies pocket hefty profits whilst residents and local authorities are left to pick up the bill.

A report published on 27th February by the Portuguese Court of Auditors into Public Private Partnerships (PPPs) in the water sector vindicates STAL’s ongoing struggle to expose the consequences of privatising public services in the water and sanitation sector. It shows how detrimental these deals are both for local authorities and ordinary citizens, who are forced to pay all the costs whilst private companies pocket hefty profits.

In most of the contracts, the “projected growth rates in population and water use, that serve as the basis for the contracts, are inaccurate and removed from the real situation on the ground.” The lack of oversight is such that “these projections were provided and approved by the relevant local authorities without having been audited or reviewed prior to the contracts being signed.” To make matters worse, the report shows that three in every four of the agreements guarantee compensation to the private service provider if there is a drop in water use or in number of consumers.

The report makes specific mentions of one decision by the Arbitration Court that awarded substantial payments to two private operators. The local council in Marco de Canaveses was forced to pay the private service provider, Águas do Marco, €18 million in compensation. Similarly, the local authority in Barcelos was made to pay Águas de Barcelos nearly €172 million in instalments over the period of the contract. This sum is nearly three times the council’s entire budget.

The profit margins are truly obscene, ranging from 9.5% to 15.5%. The Court states that “this level of expected shareholder dividend is inacceptable in light of current fiscal and budgetary constraints.” It recommends a downward revision of profit margins that are above 10% “as a consequence of changing circumstances and for reasons of fundamental public interest.”

The court’s recommendations also conclude that “the public sector licensers showed serious limitations with respect to their capacity for the financial monitoring and the risk assessment of these contracts, resulting in deficiencies in the technical and business skill set that is needed to safeguard the financial interests of local authorities and consumers.” This confirms STAL’s position that local authorities would be easily subordinated to the interests of powerful economic groups.

In the Court’s opinion, the defects in existing water legislation that are discussed by the report penalise local authorities and benefit private service providers, highlighting successive governments’ policies of enshrining protection for provide profit in law.

Equally telling is the auditor’s confirmation that “the regulatory authority has only carried out eight audits, which corresponds to 30% of total concessions, leaving much to be desired in terms of compliance with contractual obligations on the part of both licensers and concessionaries.”

The findings of this highly relevant and important report only confirm STAL’s belief that the existence of such contracts demonstrates how privatization clears the way for all kinds of corrupt practices damaging to the public interest. They also serve to disprove the consensus that legal and regulatory oversight is enough to prevent mismanagement and malpractice by private companies, whose sole motive is to extract the maximum possible profit.

It is damning that this audit has only now be carried out now, some twenty years after the first water privatisation in Portugal.

STAL believes that it is therefore vital to lay the groundwork to bring privatised water and sanitation services back under public control, to do away with these abusive and illegal contracts and to hold all those responsible to account.

Lisbon, 28th February, 2014

National Leadership of the National Union of Local and Regional Government Workers